The general presumption is that more than half of the stock markets average daily volume is due to institutional traders. Many analysts evaluate volume patterns to figure out whether money managers are bullish or bearish. Recent signs indicate that on market up days the volume has been lacking. However, we have had a rash of "bearish" distribution days over the past few weeks â€“ market losses on higher than normal volume. Money managers appear to be a little nervous about aggressively going long in the current market. Until institutional investors generate a few bullish accumulation days it might be challenging for the market to break through short-term resistance levels.
Listed below is the status of our SPY Iron Condor trade as of Friday October 30th. This position has been open for 11 days:
The entire position is $160 in the red
SPY closed at $103.56
30-day historical volatility and implied volatility have surged this week
SPY price has dropped BELOW its current 14-day EMA (see SPY chart down below)
SPY is trading BELOW its 20-day Bollinger Band SMA, and 50-day simple moving average (see SPY chart)
SPY is still well ABOVE its 200-day simple moving average (see SPY chart)
Relative Strength Indicator (RSI) has turned bearish (See Spy chart)
Moving Average Convergence/Divergence (MACD) has turned down (See Spy chart)
Bear Call Spread
We are recommending closing out the entire call spread for an approx. $940 profit (see tables below)
Bull Put Spread
This spread has a $1,100 unrealized loss (see tables below)
$102 strike price short put delta is -.3963(60% probability this trade will be profitable)
Since we are closing out the short $114 strike call, the only risk we have to manage is the $102 strike price sold put. The risk associated with the sold put will be evaluated and resolved based on the Exit Plan.
The rules for exiting the Bull Put spread are:
Anytime the market maker is willing to accept a limit price of less than .11 on one of our short strikes, buy back all the short contracts and sell the long positions on the same spread. However, if it is a few days prior to the expiration date, we can hold out for a .05 bid.
If the short put strike price is penetrated (closing price below the short put) AND the delta rises to .65 we will look to close out this spread (buy the short contracts, sell the long) and roll it out to another option series. Unless this is option expiration week, no need to overreact and rush to close the trade, many times the market will reverse itself and remove the sense of urgency. If the short strike has been violated and there is no price reversal, we cut our losses and live to fight another day.
On option expiration day, if rules 1 and 2 above have not been activated, let the Bull Put spread expire worthless and we keep the entire sold premium for any open contracts where the short strikes are not threatened.
We initiated the SPY Iron Condor as one order with four legs. As mentioned above we recommend closing the Bear Call spread. The Bull Put spread will be closed out as a separate order following the Exit Rules described above.
Most of us can recall that last year at this time the market was flying high and then all of a sudden started crashing down, culminating in the March 2009 bottom. The S&P 500 is up 53 percent since March, but the streak of seven consecutive monthly gains ended with a loss for the month of October. Is the recent surge in volatility a sign of deja vu?
Couch Potato Trader Disclaimer
All results reported in this section are hypothetical. While the numbers represented here may have been achieved or beaten by our readers, we make no representation that any individual investor achieved these exact results. The tracking for the plays listed in this section uses closing prices for the day the newsletter is published and it is not meant to imply that any reader actually received those prices (though many often do) or participated in these recommendations (even though many do). The portfolio represented here is hypothetical and for investment education purposes only. It is only an illustration of what type of gains a knowledgeable trader might receive utilizing these strategies. If you don't get close to these results, guess what. It isn't the fault of the strategies.